Is an Excess Insurance Policy Ever Excessive?

When the average person hears the word “excess,” it may call to mind a host of admonitions that permeate our culture: don’t eat to excess; don’t drink to excess; or classically, “all things in moderation,” right? So as a producer, if you are suddenly faced with a raised eyebrow when you try to broach the topic of excess insurance, it helps to be prepared with a ready answer for why an excess policy might be both necessary and prudent. It further helps to know how to explain what type and how much excess coverage is warranted.

First, is an excess policy really needed? For those who are already familiar with liability insurance, this question may seem silly. Such a view is based on the knowledge that jury awards in liability claims continue to soar to stratospheric levels, with no ceiling in sight. But for those who are most experienced with property insurance, the question is entirely valid and may require clarification; this is because there is a reasonably known limit to how much it can cost to repair or replace property that suffers a covered loss. Interestingly, as environmental insurance has matured as a hybrid between both property and liability coverage (since both types of policies typically exclude or severely sublimit pollution losses), this niche has become a key source of new excess policy placements. In some cases, growth has been driven by contractual requirements. In others, it has been propelled by highly publicized environmental disasters like the (self-insured) explosion of BP’s Deepwater Horizon drilling rig or the (under-insured) leak of Freedom Industries’ tanks that contaminated an entire city’s drinking water supply. Even though hindsight may be 20/20, it is not necessary to rely upon it to explain the potential implications of going without proper excess insurance.

After you have your insured’s attention, how do you explain the options available to provide these additional layers of protection? There are three basic approaches: a follow-form excess, a self-contained (a.k.a., stand-alone) excess, and an umbrella. A follow-form excess responds to losses that are covered by the underlying insurance but that exhaust the primary limits; it will not respond to a loss that was not covered in the primary layer. A self-contained excess is subject to only its own provisions, some of which may conflict with an underlying policy and therefore may result in gaps in coverage. Often this is particularly true in cases involving different carriers writing the primary and excess layers, because each market has its own risk tolerance and underwriting guidelines that may require additional exclusions to be imposed. In contrast, an umbrella policy may provide broader coverage than is found in the underlying policies. A true umbrella will include “drop down” provisions that enable the excess form to respond on a primary basis to loss excluded in the underlying layers, subject to a self-insured retention. While these three types of forms may seem straightforward enough, many people unfortunately may use the terms as if they were interchangeable, contributing to a general confusion in the marketplace. A lack of standardized policy language can exacerbate this problem.

On the bright side, a knowledgeable specialist can not only help you with understanding and explaining the nuances of various excess policy terms, but s/he can also assist in determining how much excess coverage is warranted by a given risk. There are three common tools utilized in this endeavor: contractual requirements, actuarial data, and claim scenarios. Of these, contractual requirements tend to be the easiest to address. By reviewing an insured’s current and targeted future contracts, a producer can quickly determine if their client’s excess coverage is adequate to satisfy the specifications of unrelated third parties. Unfortunately, what is required by a third party might have little to do with what is appropriate from the insured’s own perspective. This is where actuarial data compiled across the industry segment shared by your insured can be very helpful. In particular it can help to predict the value of the largest loss likely to occur, as well as pinpoint what excess limits others in that same risk class typically purchase and with what results. But where raw numbers may seem cold and unreal, a final tool is crucial. Claim scenarios—especially examples drawn from real life events—can awaken an insured to the harsh realities faced by others in their type of business. Particularly in the case of a discretionary environmental insurance purchase, such examples can help explain in a concrete way how a lack of prior pollution losses does not equate to a lack of pollution exposures.

In combination, an understanding of the need for excess insurance, of the options in the marketplace, and of the tools available to construct an appropriate excess insurance program will maximize your value to your client. In cases where such knowledge may not be readily available among the staff at hand, never hesitate to reach out to a strong insurance partner, whether broker or underwriter, to provide you with this information. They exist to help you and your client. And after all, no one wants their function to be seen as “excessive,” do they?

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